Dec. 13, 2017
As of November, Kansas now has a new estimate of general fund revenue and five months of collection experience following the repeal of the Brownback tax experiment. What are the key takeaways from this information?
Repealing the tax experiment made a huge difference. Income tax receipts dropped dramatically in FY 2014 when the Brownback tax cuts were first implemented, and receipts stayed at that low level until the experiment was repealed. That sharp drop in income tax receipts was the key factor that threw the Kansas budget into crisis from FY 2014 through FY 2017. The new consensus revenue estimate now forecasts post-repeal income tax revenue of $2.9 billion in FY 2018 and $3.0 billion in FY 2019, putting Kansas in a position to begin financial recovery.
Wait until May for a final tally of income tax receipts. After the Brownback tax plan was repealed, estimators predicted income tax receipts would rise $582 million during FY 2018, but through the first four months of FY 2018 it appeared that income tax revenue might rise even higher. Yet, the revenue forecasters declined to change their overall income tax estimate when they revised their forecast in November. Starting in calendar year 2017, “pass-through income” was once again subject to taxation. Normally people owing taxes on that income would make quarterly payments in April, June, September, and January or face a penalty. However, in this changeover year, individuals can choose to skip the quarterly payments without risking a penalty and make one large payment by April 15 when they file their 2017 tax return. Some individuals have resumed making quarterly payments while others are waiting, which makes forecasting more difficult.
Sales tax receipts and corporate income tax receipts are growing, a positive economic sign. In the first five months following repeal of the Brownback tax plan, sales tax receipts grew 4.4 percent over that same period the year before, and corporate income tax receipts grew almost 40 percent. Both of these tax sources respond relatively quickly to changes in economic conditions. For sales tax revenue, 3 percent growth or better is a positive indicator, especially when growth had been stagnant during the tax experiment period. Corporate income tax receipts can fluctuate quite widely, but a 40 percent upswing is certainly a positive sign for the general fund revenue picture.
Kansas is not financially healthy yet. Repealing the tax experiment took the state budget out of crisis mode. However, even after plugging in the more robust numbers from the November revenue estimate, the FY 2018 general fund budget only balances after a $288 million direct transfer from the highway fund and a $118 million short-term loan.
Kansas still has a structural budget imbalance of more than $200 million. That imbalance must be erased before Kansas can be financially healthy. That’s step one. But the state must also fix its school finance system, replenish reserves, stop large highway fund transfers, and repair state agency budgets.
The damage that Kansas sustained from multiple years of unaffordable income tax cuts has been immense. Ending the Brownback tax cuts put Kansas on the road to recovery. Staying on that road must be the highest priority of the 2018 Legislature.